ETFs – The Next Accident Waiting to Happen?
How many of those holding ETF’s know what the ETF stands for? How many know how they work? How many understand the leveraged ETF’s and their risks? How many understand the hedging procedures? How many have actually created, priced, and hedged ETFs? The answer to all the above is probably very few. Despite being a relatively complex field within the creative finance industry, especially the exotic and leveraged versions, few people actually understand what they trade, and even less the risks involved with these products.
A few weeks ago we saw many novice investors get crushed in their TVIX holdings. Below is a good summary, by a non banker, explaining in plain english about some of the risks associated with ETFs. Don’t forget, 80% of the issued ETFs, are done by 6 players. Most of those had to be bailed out by the taxpayers. Those are some risks to think about….From Golem.
Where will the next point of instability be? Not what will trigger the next liquidity and credit crunch and cause the next landslide of panic selling and losses. We can already see many candidates for the trigger. But what will be the mechanism by which it is amplified and spread?
I think that in a couple of years, unless something alters the current trends in money flows, we will come to know ETFs the way we already know the securitization and packaging of sub-prime mortgages into CDOs. I think the signs are already there to suggest ETFs are where the instability and risk is accumulating. If I am in any way correct then ETFs will be to the next stage in our on-going state of siege-mentality crisis what CDOs were to the last.
To substantiate this claim I have to tell you in simplified terms what an ETF is. And then explain how, despite all the differences between mortgage backed CDOs and ETFs, the latter generally being based on stocks, bonds and commodities rather than mortgages, they are undergoing the same evolution from simple to opaque, stable to unstable, are being seen as the provider of liquidity and risk-controlled ‘exposure to risk’, just as CDOs were, when in fact they are concentrating risk and will, in a moment of panic, cause liquidity and lending to collapse.
Gold, Silver and Oil chart Update
Gold is approaching “must hold” levels here.
Oil is losing momentum, but still stuck in a range.
Silver approaching 30….
Charts below.
Super Mario, not so super?
We just learnt that the ECB did not discuss rates at their meeting. Maybe they will tell us what they discussed. In the meantime, Draghi’s full speech.
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Fernández Ordóñez for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Inflation rates are likely to stay above 2% in 2012. However, over the policy-relevant horizon, we expect price developments to remain in line with price stability. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest survey indicators for the euro area highlight prevailing uncertainty. Looking ahead, economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks.
Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Over the last few months we have implemented both standard and non-standard monetary policy measures. This combination of measures has helped both the financial environment and the transmission of our monetary policy. Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner.
Chart Update
It feels the markets have been all over the place, but in fact, the “real” markets have traded in a range over the past weeks. The Eurozone momo countries have fallen aggressively over the past months. IBEX and the MIB have reached some short term support levels. If these levels break on us, it will be nasty. SPX and the DAX on the other hand, have been accumulating for a break out soon.
Essential charts below.
A Reason Not to Trust Friday’s BLS Numbers
Get ready for the Friday BLS figures. Biderman’s take on what to expect, and what to trust.
This Friday the Bureau of Labor Statistics will release its guess as to how many jobs were created in April. The media nitwits will report whatever the number as if it were the gospel truth. Those who need the action will trade the number as if it means something.
It is sad to me that the BLS and everyone else but us ignores the fact that real time data is readily available on how many people are working and how much they are making. Where? Embedded in the withheld income and employment taxes sent to the US Treasury every day by all employers.
The truth is that the initial BLS new jobs number is a joke even in the eyes of the BLS. How do I know that? I just reread some BLS footnotes for the first time in several years. (full notes here).
Full video below.
Austerity and Merkel
Austerity, debt, north vs south, conflicts and much more. How is Merkel actually dealing with the Eurozone crisis? Must read by Spiegel.
Angela Merkel’s euro crisis strategy is unpopular and she has lost a number of allies.Worse yet, French presidential candidate François Hollande has pledged a change of course from the strict austerity measures she supports.
But in the end, the Paris-Berlin alliance will likely survive and austerity will continue, albeit with a few growth initiatives thrown in.
Full article click here.
News That Matters
All you need to read and much more below.
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